 Introduction
If you own rental property, you must report rental income and deduct allowable expenses to determine taxable rental profit. Proper reporting can help reduce tax liability while ensuring compliance with IRS rules.
This guide explains how to report rental income, claim deductions, and reduce tax liability on IRS Form 1040, Schedule E.
 Tax Code References for Rental Income and Expenses
- IRC § 61(a)(5) – Defines rental income as taxable income.
- IRC § 469 – Establishes passive activity loss rules.
- IRC § 280A – Governs rental use of vacation homes.
- IRC § 168 – Covers depreciation deductions for rental properties.
 Relevant IRS Forms for Reporting Rental Income
- Schedule E (Form 1040) – Reports rental income and expenses.
- Form 4562 – Reports depreciation on rental property.
- Form 8582 – Reports passive activity loss limitations.
 What Qualifies as Rental Income?
1. Rent Payments
- Any amount received for renting out property is taxable rental income.
2. Security Deposits
Refundable security deposits are not taxable unless retained for unpaid rent or damages.
3. Advance Rent
Rent paid in advance is taxable in the year received, even if applied to future years.
4. Additional Payments from Tenants
If tenants pay for repairs or utilities, these amounts must be included as rental income.
5. Deductible Rental Expenses
The IRS allows deductions for ordinary and necessary expenses, including:
Mortgage Interest (IRC § 163)
Property Taxes (IRC § 164)
Depreciation (IRC § 168)
Repairs and Maintenance
Insurance Premiums
Property Management Fees
Legal and Accounting Fees
Advertising Costs
Utilities (if paid by the landlord)
6. Step-by-Step Guide to Reporting Rental Income and Expenses on IRS Form 1040
Step 1: Gather Rental Income and Expense Records
- Collect rental agreements, receipts, and expense records.
- Review Form 1099-MISC or Form 1099-K if payments were received through rental platforms.
Step 2: Report Rental Income on Schedule E (Form 1040)
- Line 3 – Enter total rental income received.
- Line 4-19 – Deduct allowable expenses (mortgage interest, property taxes, insurance, etc.).
Step 3: Calculate Depreciation on Form 4562
- Depreciate rental property over 27.5 years (residential) or 39 years (commercial).
- Report depreciation expense on Schedule E, Line 18.
Step 4: Apply Passive Activity Loss Rules (If Needed)
- Losses from rental activity may be limited unless actively participating.
- Report excess losses on Form 8582.
Step 5: Report Net Rental Income on Form 1040
- Transfer net rental income from Schedule E to Line 5 of Schedule 1 (Form 1040).
Step 6: File Your Tax Return
- Attach Schedule E, Form 4562, and Form 8582 (if applicable).
 Example Scenarios for Rental Property Taxation
Example 1: Taxable Rental Income with Deductible Expenses
- John rented out his apartment for $24,000 in 2024.
- His deductible expenses include:
$6,000 mortgage interest
$3,000 property taxes
$2,500 insurance and maintenance
$3,500 depreciation
- His taxable rental income is $9,000 ($24,000 – $15,000 expenses).
Example 2: Rental Property Operating at a Loss
- Sarah collected $18,000 in rent but had $22,000 in expenses.
- Since she actively participates, she can deduct up to $25,000 in rental losses.
- If her adjusted gross income exceeds $150,000, she cannot deduct losses in the current year but can carry them forward.
Example 3: Short-Term Rental and Vacation Home Rules
- Mark rented his vacation home for 10 days and used it for 60 days.
- Since rental use was fewer than 14 days, he does not report rental income.
 Common Mistakes to Avoid
- Failing to report rental income – The IRS receives 1099-MISC and 1099-K reports from rental platforms.
- Not depreciating rental property – Depreciation reduces taxable income.
- Misclassifying repairs vs. improvements – Repairs are deductible immediately, but improvements must be capitalized.
 IRS Compliance Requirements
- Report all rental income, even if not issued a Form 1099-MISC or 1099-K.
- Keep records of rental expenses and depreciation schedules
- File Schedule E and Form 4562 for depreciation.
 Conclusion
Reporting rental income correctly reduces tax liability and ensures IRS compliance. Understanding deductions, depreciation, and passive loss limitations is essential for rental property owners.
For expert tax guidance on rental income taxation, consult Anshul Goyal, CPA EA FCA, a Certified Public Accountant and IRS compliance expert.
 FAQs
1. Do I need to report rental income if I rent my property for a short period?
If rented for fewer than 15 days, rental income is not taxable under IRC § 280A.
2. How does depreciation affect my rental income?
Depreciation reduces taxable rental income but may trigger recapture tax when selling the property.
3. What happens if my rental expenses exceed my rental income?
If actively participating, up to $25,000 in losses can be deducted. Otherwise, losses are carried forward.
4. Where do I report rental income on my tax return?
Enter rental income and expenses on Schedule E (Form 1040), then report the net amount on Schedule 1, Line 5 of Form 1040.
5. Are Airbnb and short-term rentals taxed the same as long-term rentals?
Yes, unless the property is rented for fewer than 15 days or qualifies as a business under self-employment tax rules.
 About Our CPA
Anshul Goyal, CPA EA FCA, is a Certified Public Accountant and IRS compliance expert specializing in rental property taxation, real estate deductions, and depreciation strategies.
For personalized tax assistance, schedule a consultation with Anshul Goyal, CPA EA FCA today.